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Make Sure That ‘Free’ Bank Account Is Really Free

March 11, 2015
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When you see a promotion for a “free” checking account, it’s wise to question the claim, especially with banking fees on the rise.

While free or low-cost accounts are increasingly hard to find, it’s not impossible, says Paul Golden, a spokesman for the National Endowment for Financial Education. However, “there’s more responsibility on the consumer to do their homework, shop around and understand and read the mechanics and structure of an account,” Golden says.

The fine print

Scouring the fine print and disclosures about rates and fees represents your first line of defense against sneaky charges. Golden says many “free” accounts usually have requirements, the most common of which are having funds directly deposited into the account, paying bills online or keeping a minimum balance. Look for any fees that kick in if these conditions aren’t met.

Other common charges include:

  • ATM fees: While most banks and credit unions have free cash machine networks, you’ll likely pay a fee to use a “foreign” ATM that is outside the bank’s network. Even if your bank doesn’t charge you for using one, the ATM owner may still assess a fee. Actions other than withdrawing money, such as checking a balance, may also result in a fee, Golden says.
  • Transaction limits: Check for withdrawal limits. Some providers cap the number you can make through cash machines or checks you can write in a month. These limits are more common on savings than checking accounts.
  • Overdraft charges: If your account provider lets you overdraw, or spend more than the available balance, you’ll likely be whacked with a fee, often more than $30, for the privilege. And you may be charged interest on the money you’re spotted. Even if you link to another account for overdraft protection, you may still be charged a transaction fee. Golden says the best way to avoid it is not to overdraft by keeping a cushion in your account.
  • Debit fees: At a payment terminal, many debit cards with personal identification numbers, or PINs, can also be processed as credit cards. Due to a difference in transaction processing costs, some account holders get charged a small fee when they pay using a PIN. Golden has seen fees as high as 25 cents per transaction. Other financial institutions require a certain number of debit card payments per month to keep an account “fee free.”
  • Other fees: You may also be charged for paper checks, using a teller, for long periods of inactivity, receiving paper account statements, replacing a debit or ATM card, stopping payments or for returned items.

Other ways to avoid fees

Studies have shown that the biggest banks charge the most fees.

“A lot of community banks, credit unions, and online banks that aren’t brick-and-mortar can offer more cost-competitive checking accounts that are by definition free without hidden charges,” says Golden, whose nonprofit group promotes financial literacy. Staying away from bigger banks can help you escape fees.

Consider visiting a nearby branch office or calling to ask about requirements and fees. Being proactive and asking questions may not only help you learn more about the account and feel more confident with that financial institution, but “if somebody can’t explain how those fees work, that’s a red flag,” Golden says.

Consumers tend to open accounts first and then get the details about terms and conditions, Golden says. He suggests anyone looking to set up a new account to shop around to find the best rates and conditions, and then open one that best meets your needs. 

Sign-up bonuses

Many banks offer bonus money when you open a new account, but like credit card promotions, there are always qualifying requirements. These conditions often include putting in a minimum amount, setting up direct deposits and sometimes making payments online. Before you switch banks for bonus cash, make sure you know the requirements and can meet them.

Your efforts aren’t always enough

Just doing the homework isn’t always enough. M&T Bank in Buffalo, New York, advertised “no strings attached” free checking, but failed to disclose important eligibility requirements. When nearly 60,000 customers didn’t meet these mysterious requirements, they were switched to accounts with fees.

The Consumer Financial Protection Bureau took action against the bank in October 2014, requiring it to refund $2.9 million in fees and pay a $200,000 penalty. The agency also warned all financial institutions to avoid similar practices.

So while doing the utmost to avoid these costs may sometimes fall short, reading the fine print and asking the right questions before you open a ‘free’ account makes it likely you’ll uncover any hidden fees and caveats.

Emily Starbuck Crone is a staff writer covering personal finance for NerdWallet. Follow her on Twitter @emstarbuck and on Google+.

Image via iStock.